Student Loan Debt A National Bankruptcy Disaster

19 Sep Student Loan Debt A National Bankruptcy Disaster


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Discharge of student loans in bankruptcy is an uphill battle according to a New York Times article. News papers these days abound with descriptions of truly desperate families saddled with massive student debt. The story of Ohio student loan debtor Doug Wallace, age 31, unemployed and legally blind is hardly unusual. In fact, it is so commonplace that bankruptcy lawyers hardly pay attention to such cases and their compelling facts.

While bankruptcy discharge of student loan debt is theoretically possible, and does occur in a few cases, it is a difficult proposition at best. A debtor seeking relief from student loan debt must convince the court their financial situation is not only hopeless; they must prove it will not likely change for the better in the future. Without dramatic facts, discharge of student loan debt is denied in most bankruptcy courts.

How did this awful situation come about? Why is it so hard to get rid of student loans? Why hasn’t Congress done something about the problem? The reasons are as many as the number of dollar bills flooding the halls of power in Washington, DC. Poor students have no money to hire lobbyists but giant banking interests have plenty to spend on the best Congress money can buy.

In the 1970s, the bankruptcy code contained two options for the discharge of student loans. First, if the loan had been in a payment status for at least five years, the debt could be discharged just like any other debt. The second option, in the event the student loan did not qualify due to its payout status, allowed discharge in the event payment of the loans would cause an “undue hardship” for the debtor or the debtor’s family. Only government guaranteed student loans were accorded this special protection.

The current legal standard for bankruptcy discharge of student loan debt was first formulated by the Second Circuit Court of Appeals in a 1987 case called Brunner v. New York State Higher Education Services Corp., 831 F2d 395. The so called “Brunner Test” has been adopted by most federal courts throughout the country and is the bane of student loan debtors everywhere. All this came about due to word “undue”, included by Congress, in the statute governing the dischargeability of student loans in bankruptcy cases.

The Brunner court in 1987, confronted with the undue hardship language, reasoned that the word “undue” must mean something more than just a regular hardship. So, in order to help define the law, it created a three prong test. The debtor was required to prove that (1) That the debtor cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off student loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans. Marie Brunner, debtor in that famous case, did not fully meet those standards and was denied discharge. She could not prove any additional circumstances that indicated things would not change in the future.

In 1990, the law was changed to require seven years in payment status before a student loan could be discharged. , In 1998, the payment status discharge option was deleted entirely from the statute by Congress. This left only the “undue hardship” standard for discharge. In 2005, for no particular reason disclosed in legislative history, Congress accorded private student lenders the discharge protection once only allowed to government guaranteed or government funded student loans.

Now, it is time for another change in the law. This time Congress should help relieve student loan borrowers from a lifetime of debt slavery. Full bankruptcy discharge should be permitted for all student loans.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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